The S&P 500 continues to rocket higher in the first three months of 2024, fueled in part by the continued outperformance of the "Magnificent Seven."
The seven monster stocks accounted for practically all of the S&P 500's positive performance in the first half of 2023 and have continued to move higher as a group since then. Not every member of the group has beat the market in 2024, but those that have -- Nvidia (NASDAQ: NVDA) and Meta Platforms -- have significantly outperformed. Apple and Tesla are the only members that have meaningfully lagged the broader index.
While the performance of the Magnificent Seven since the start of 2023 has been spectacular, every good investor knows past performance is not indicative of future results. Investors should be determining whether today's stock price justifies the potential future returns from the business. That's where one of the Magnificent Seven looks particularly appealing, and another member seems overpriced.
Within this elite stock group, the most attractively priced for long-term investors is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Alphabet is the company behind Google, which took a 92% share of the global online search market last month. That kind of reach is enviable for just about any ad-supported internet service, but Google can turn the dial a little more with its ancillary services. It counts nine separate products with over 1 billion users. That gives it a ton of data on its user base, which it can use to tailor its ad products and boost its prices relative to other companies.
Among those nine products with over 1 billion users is its Android operating system. The mobile OS holds a dominant global market share while still supporting nearly half of all smartphones in the U.S., where Apple's iPhone is exceptionally popular. Owning the mobile platform for the majority of smartphones in use around the world cements Google's position in search on mobile, despite regulatory challenges against its arrangement with Apple.
Google's strong position in search resulted in 11% ad revenue growth in 2023. But Alphabet has several other growth drivers. Its public cloud computing service, Google Cloud, is growing quickly, up 26% last year. What's more, Alphabet's Other Bets segment includes several promising companies, including Waymo, its autonomous vehicle company. If any of these moonshots pay off, it could result in a multibillion-dollar opportunity for Alphabet and its investors.
Alphabet is well-positioned for consistent revenue and profit growth for years to come. Meanwhile, the stock trades for a forward P/E ratio of 22.4. That's a slight premium to the S&P 500, but still inexpensive relative to its other high-flying peers in the Magnificent Seven.
With consistent revenue growth and margin expansion, plus the potential for a moonshot to payoff, Alphabet looks like the best stock to buy among the tech giants.
If there's one stock among the "Magnificent Seven" I can't get on board with, it's Nvidia. Despite the strong performance of the company, the stock price seems to have gotten well ahead of the actual results. What's more, the outlook for the business doesn't look as strong as its recent past.
Nvidia's results have been driven by its data center business for the last few years, which mostly stems from the boom in artificial intelligence large language models (LLMs). Nvidia's graphics processing units are well-suited for training LLMs. Its chips are more performant and power-efficient than anyone else's off-the-rack solution, and it's managed to maintain that lead over competitors for a long time now. As a result, data center revenue grew from $3 billion in fiscal 2020 to $15 billion in 2023 to $47.5 billion in 2024.
Not only has Nvidia's revenue skyrocketed, but its margins expanded too. Gross margin expanded from 63% in the fourth quarter last year to 76% this year. Likewise, it exhibited incredible operating leverage over the past year, as operating expenses barely budged relative to its revenue.
But there's an important factor that's driven those results: supply constraints. Those supply constraints could be alleviated by the end of 2024, according to Nvidia's manufacturing partner, Taiwan Semiconductor Manufacturing. At that point, gross margin will come down, and Nvidia will have to sell more chips to maintain revenue growth.
Meanwhile, competitors are coming to market with viable alternatives to Nvidia's GPUs. Not only that, but some of its biggest customers, the big tech companies in the Magnificent Seven, have designed their own chips for training their LLMs. On top of that, demand should shift from the GPUs needed to train LLMs to chips needed for running AI applications on devices. As a result, the demand for Nvidia's chips may not sustain its current level.
It doesn't take an advanced economics degree to understand that growing supply and falling demand means prices will come down. While Nvidia can certainly do well despite the pressure, its stock is priced like companies will continue to pay top dollar for as many chips as Nvidia can produce.
Shares currently trade around 39 times forward earnings. But with profit margin under pressure as supply-demand levels normalize, it'll be hard for Nvidia to keep growing earnings at a level that can make that high multiple worth it for long-term investors.
Should you invest $1,000 in Alphabet right now?
Before you buy stock in Alphabet, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
See the 10 stocks
*Stock Advisor returns as of March 25, 2024
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Apple, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
1 "Magnificent Seven" Stock to Buy Hand Over Fist, and 1 to Avoid Like the Plague was originally published by The Motley Fool
